Finance Finance News RBA remains against negative interest rate despite rising unemployment

RBA remains against negative interest rate despite rising unemployment

The Reserve Bank has signalled it won't be moving to a negative cash rate to try to stimulate the economy. Photo: Thinkstock/iStockphoto
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The Reserve Bank views negative interest rates as being an “extraordinary unlikely” course of action in Australia, even though it is predicting the unemployment rate rising to 10 per cent by the end of the year.

In its quarterly statement on monetary policy released on Friday, the central bank says negative interest rates would be put downward pressure on the Australian dollar.

“Negative rates come with costs too. They can cause stresses in the financial system that are harmful to the supply of credit and they can encourage people to save rather than spend,” it says.

The Reserve Bank also believes at a time when the value of the Australian dollar is broadly in line with its fundamentals and the market is working well, there is not a case for intervention in the foreign exchange market.

The cash rate was cut to a record-low 0.25 per cent in March and has remained there since.

The central bank also entered into a bond-buying program to ensure the economy has sufficient liquidity in the face of sharp downturn from the impact of the coronavirus pandemic.

“The board is committed to doing what it can to support jobs, incomes and businesses in Australia through this difficult period, and thereby help build the bridge to the recovery,” the statement says.

“The board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3 per cent target band.”

In its latest forecasts, the RBA expects the interest rate sensitive underlying rate of inflation will remain below two per cent until at least December 2022.

It expects, in what it calls its baseline case, the unemployment rate will hit a peak of 10 per cent in December, rather than the nine per cent rate predicted three months ago.

It then expects a gradual easing to seven per cent by December 2022.

It still expects economic growth will contract by six per cent this year but the recovery will be slower than previously thought.

“The effects of the heightened activity restrictions in Victoria are likely to offset the pick-up in GDP growth in other parts of the economy in the September quarter,” the statement says.

The announcements come as Australian shares were fell in trading today while gold, silver and the Nasdaq hit record levels again.

Precious metals have experienced strong gains over the past months, surging beyond the US$2000-per-ounce mark for the first time this week.

Silver climbed above a seven-year high, and have surged faster than gold prices. Photo: Supplied

That was despite strong gains on Wall Street, as investors bet the United States would soon have no choice but to break their deadlock and pass a new stimulus package.

Republicans are advocating liability protection for businesses while Democrats want to spend a lot more than $US1 trillion on the latest coronavirus aid bill.

-with agencies